This is a report published for the Roosevelt Institute, and can be found here. It builds on the Neo-Brandeisian canon and tries to develop an applicable antitrust standard out of it. According to the authors, the consumer welfare standard is to blame for the role that competition has played in a number of social ills, including increased market concentration.

To redress this, the authors advance an alternative standard: the effective competition standard. This framework would restore the primary aim of antitrust, namely to protect competition wherever it has been compromised. This new standard would: 1) protect individuals, purchasers, consumers, and producers; 2) preserve opportunities for competitors; 3) promote individual autonomy and well-being; and 4) disperse and de-concentrate private power. In particular, the effective competition standard would allow enforcement against vertical integration and the adoption of bright-line indicators for anticompetitive behaviour.

The paper is structured as follows:

It begins with an introduction that describes a number of economic trends, and explains that lax antitrust enforcement has played a role in their development.

Increasing amounts of evidence point to less competition, greater concentration, greater market power, and widening wealth and income inequality. Antitrust laws are supposed to deal with concentrated economic power, but they have been hijacked in two ways. First, ideologues changed the legal standard from addressing a variety of political, social and economic goals towards a focus solely on consumer welfare. Second, some courts and enforcers have gone further than confining antitrust solely to consumer welfare, and have instead promoted economic policies that neither improved welfare nor promoted competition. In particular, courts have elevated the burden of proof on the government and other antitrust plaintiffs to such an extent that the Sherman and Clayton Antitrust Acts have become unenforceable for many anticompetitive practices.

Part I of this paper outlines how U.S. antitrust policy and enforcement have waxed and waned over four cycles.

The cycles are: (i) between 1900-1920, when antitrust began to be enforced by administrative agencies and effective enforcement actions – such as the break-up of Standard Oil – were adopted. (ii) 1920-early 1930’s, when antitrust intervention was rare because government preferred to rely on forms of corporatism and state-business cooperation to manage the economy. (iii) late 1930s – late 1970, when antitrust was seen as key to promoting free enterprise, economic growth and political freedom. (iv) since the late 1970’s, when antitrust contracted under the Chicago, Harvard, and post-Chicago Schools’ neoclassical economic theories.

Part II describes the rise of the consumer welfare standard during the last policy cycle.

Before 1975, the U.S. Supreme Court never mentioned the term “consumer welfare” in an antitrust case. That changed with the rise of the Chicago School of Economics in the late 1970s. Chicago School–influenced enforcers viewed the political and moral cases for antitrust as insufficiently rigorous and somehow diluting antitrust policy from its true purpose: promoting economic efficiency, which the Chicago School frequently conflated with consumer welfare. This led to the increased technicality of antitrust and the use of strictly neoclassical economic theory, building on assumptions of self-correcting markets and free entry as “natural” market conditions. This led to reduced antitrust enforcement, with the exception of cartel prosecutions.

Part III outlines the operational difficulties that courts and agencies have experienced in applying the consumer welfare standard.

The decline in public enforcement followed adverse court rulings that made the barriers to winning such cases insurmountable. Part of the problem was the courts responding to the perceived (and at times actual) excesses of private antitrust claims. At the same time, the FTC and DOJ largely stopped prosecuting vertical price-fixing cases long before the Supreme Court ruled that they should be considered under a rule-of-reason legal standard.

Furthermore, the consumer welfare standard presents a number of significant impediments for enforcement: (i) it does not have a well-defined meaning; (ii) it has been interpreted differently by different courts, and is subject to significant measurement difficulties; and (iii) it provides no guidance for conduct that affects economic agents upstream, as opposed to consumers downstream.

Part IV looks at recent empirical research to demonstrate that use of the consumer welfare standard has not benefitted consumers nor their welfare.

Nowadays, the U.S. economy has a market power problem. A small number of firms reap significant supra-competitive profits in many industries, while competition has decreased in many markets. Markets are also becoming less dynamic, with relatively fewer entrants. It seems that higher mark-ups have flowed not from greater efficiencies, but from greater market power.

Antitrust policy has contributed to this market power problem. A number of studies suggest that the U.S. competition agencies are inadequately enforcing the competition laws, particularly as regards mergers. Scholarship has shown that institutional investors may soften competition because of their significant ownership stakes in competing firms in concentrated industries. Profit margins are widening, with a few firms reaping a significant share of the gains. At the same time, wealth inequality is growing. Maybe antitrust policy is not solely responsible for these developments; but it is part of a wider set of economic policies that have led to these outcomes.

Part V outlines the contours of the effective competition standard. It explains how it differs from the consumer welfare standard, and how it can be implemented.

Antitrust, historically, was never about promoting allocative efficiency or some inchoate consumer welfare standard. Instead, antitrust was originally about promoting the social, political, and economic benefits that flow from an effective competitive process. Unsurprisingly, all but one of the competition agencies surveyed by the ICN cited “[e]nsuring an effective competitive process” as an objective of the monopolization laws.

The idea of ‘competitive process’ is somewhat vague, so to provide courts and agencies greater guidance, the authors propose a definition: ‘Agencies and courts shall use the preservation of competitive market structures that protect individuals, purchasers, consumers, and producers; preserve opportunities for competitors; promote individual autonomy and well-being; and disperse private power as the principal objective of the federal antitrust laws.’

The effective competition standard differs from both the consumer welfare standard and the total welfare standard by expressly departing from partial-equilibrium analyses of a single market as the basis for antitrust analysis. Furthermore, the effective competition standard: (i) lowers the standard of proof for an infringement to be found, since it merely requires a substantial lessening of competition, without requiring demonstration of actual effects or a balancing of such effects with possible efficiencies. As regards unilateral practices, the standard may vary in line with the market power of the defendant. (ii) takes a harder stance on monopolists and protects the activities of competitors, in particular by institutionalising a right to market access. (iii) looks at competitive impact throughout the supply chain, instead of only on consumers; (iv) adopts stronger presumptions of harm in merger control; (v) looks at non-price parameters; (vi) envisages the application of harder, structural remedies.

In order to implement this standard, either courts or Congress would have to adopt it in legal statutes or judgements. In addition, the Supreme Court’s unwieldy rule of reason would have to yield to clearer legal presumptions.

Part VI raises and addresses several objections that the effective competition standard may present.

These include: (i) the standard would not be administrable – this objection also applies to the ‘consumer welfare’ standard, as a withering review of recent case law and (absence of) enforcement initiatives shows. Instead, the effective competition standard and concomitant legal presumptions will bring antitrust closer to rule-of-law ideals. Applying legal presumptions that focus on preserving competition will be more straightforward than applying the rule-of-reason. (ii) the standard would move away from ‘economics’ – this is not a problem, because evolving (and disputed) economic theory cannot provide the requisite guidance for courts and agencies to establish civil and criminal illegality. That is a legal question, and economics should be subservient to it. (iii) this standard will harm consumers – experience shows that an economy characterized by concentrated market power does not serve consumers. The effective competition standard would serve us far better than the consumer welfare standard because it expands the conduct that can incur antitrust liability precisely in order to confront significant market power; (iv) the standard would politicise antitrust – but this is also true of the consumer welfare standard. Any economics-based competition policy is normative. Subjective value judgments underlie “objective” economic standards, and the objectives of such analysis will vary depending on the normative goals of competition law. Antitrust always had political goals and implications, since it centrally concerns the distribution of wealth and power in the economy and in society. Given the adoption of stricter rules and presumptions, the (political) discretion of courts and agencies would actually be limited by comparison to the status quo.

Comment:

Despite its openly partisan tone, this paper provides a solid overview of serious research and is a piece that deserves being taken seriously. It provides an extensive description of empirical analyses of recent US enforcement practices; a detailed discussion of the vagueness of the ‘consumer welfare’ concept, which I discussed last week; and a discussion on changes to the structure of markets which tracks closely a number of papers I have circulated in the past –which can be found here – and the ‘Market Concentration’ roundtable that took place at the OECD last June.

Having said this, the paper shares a number of defects that, from my perspective, are common failings of the neo-Brandeisian approach. First, the argument that competition is the root cause of all macroeconomic developments and social ills that the authors describe is not properly grounded in evidence. As the recent discussions at the OECD has made clear, it is unclear what role antitrust enforcement played in these macro-economic developments, or how changing the way antitrust is enforced would impact these economic trends.

As to the proposed standard, the mere attempt to develop legal standards always meets my favour. At the same time, the ‘effective competition standard’ – like most Neo-Brandeisian-influenced standards – seem to borrow from European language (if not practice) regarding the ‘protection of the competitive structure’ in order to advocate for stricter antitrust enforcement. The authors openly acknowledge that: ‘There is no doubt that the goal of promoting an effective competitive process has its own infirmities. It simply shifts the debate to a larger, unresolved issue—namely, defining an effective competitive process.’ The authors seek to provide a definition, but I am not sure that this definition provides coherent or administrable guidance on competition enforcement, or why the changes in question cannot be achieved within the scope of the consumer welfare standard.

As Ariel’s paper above argued, one should distinguish between legal standards, normative goals and enforcement benchmarks. The authors repeatedly argue that their proposed legal standard will improve the administrability of competition law because it allows for the adoption of legal presumptions. However, this begs the question of why adopting presumptions requires a change in standard, since it seems to propose a new strategy in the implementation of a standard, instead of the adoption of new normative content. In this respect, I think that the criticisms directed by Petit and Melamed at Tim Wu’s attempt to develop a new competition standard which I reviewed last week would also likely apply here.